For long-term investors, Altria Group (NYSE:MO) has been a hugely successful holding, with the tobacco giant having overcome decades' worth of challenges to produce huge long-term gains. Coming into Wednesday morning's second-quarter earnings report, Altria shareholders had hoped to see continued growth from the company, as efforts to raise prices would hopefully offset long-term trends toward lower cigarette volume. As it turned out, cigarettes shipments rose again in the second quarter, and that helped to produce solid earnings gains and substantial sales growth. Let's take a closer look at how Altria performed during the quarter and what's ahead for the company.
Altria defies skeptics with strong earnings gains
Altria's second-quarter results provided yet another example of the company's resiliency even in the face of challenges. Net revenue jumped 5.7% to $6.61 billion, and after taking into account excise taxes, Altria's sales were about $125 million higher than investors had expected. As we've seen in past quarters, efforts to keep costs down magnified the impact of the higher sales figures on the bottom line, with Altria seeing net earnings climb nearly 15% to $1.45 billion. That produced earnings of $0.74 per share, topping consensus estimates by $0.03 per share.
As we've seen several times in recent quarter, the most surprising performance among Altria's main segments came from the smokeable products division. Cigarette volumes rose more than 3% during the quarter, and even after adjusting for trade-inventory movements and other unusual factors, Altria believes that volumes rose by about 1%, outpacing the flat performance in the industry as a whole. Adjusted operating company income from smokeable products jumped almost 16% on sales gains of 6.5%, and strength both from the key Marlboro brand and from the discount arena contributed the most to the division's success.
Altria's smokeless products segment also continued to show signs of growth. Revenue rose by about 4%, and shipment volumes rose almost 3%, led by gains in the Copenhagen smokeless-tobacco brand. Operating income from the segment also posted roughly a 4% gain on an adjusted basis, although margins declined slightly from year-ago levels.
Elsewhere, Altria's wine segment showed solid growth, with 9% volume gains led by the Columbia Crest brand and helping to produce double-digit percentage growth in revenue. Operating company income soared 25%, although the impact of the division is minimal because of its relatively small size.
CEO Marty Barrington highlighted the many positive elements of Altria's results. "Our tobacco companies' brands continued to strengthen their market leadership," Barrington said, noting the fact that Marlboro reached record levels of market share. The CEO seemed pleased with the company's performance and looked ahead to a bright future.
Can Altria keep climbing?
Altria also upgraded its guidance for the full 2015 year's earnings, although the size of the increase was minimal at best. Altria now expects that adjusted earnings per share will end up between $2.76 and $2.81 per share, which is a penny higher than the previous range it provided for its 2015 results.
At the same time, though, Altria warned that growth in earnings will likely slow in the second half. It noted that the boost it has gotten from lower gasoline prices will moderate as comparisons with the prior-year period start to incorporate the plunge in crude oil late in 2014, and it also sees state excise-tax increases playing a role in holding back growth. Moreover, Altria has gotten a considerable benefit from buyout payments related to federal tobacco quotas, and they're slated to end in the fourth quarter.
Still, Atlria is willing to put its money to work for shareholders, announcing a new $1 billion stock repurchase program. It spent about $263 million on buybacks during the second quarter, using up almost all of its prior authorization, and so the new program will allow the pace of those buybacks to continue.
Altria stock initially gained on the news but fell 1% in the first hour of trading in the regular session following the announcement. Nevertheless, despite short-term movements in the share price, Altria has demonstrated a lasting ability to keep gaining ground, and many investors have ridden their Altria holdings long enough to see them transform into riches.